Comparison Of The Lease Options Case Study Samples

Introduction

In this case, ABS parking is considering leasing the parking areas from the City of Parkington. This is an attempt by the city to raise additional revenue in order to finance other operations. The lease duration is for 20 years after which ABS Parking is supposed to terminate the lease and hand over the parking areas back to the City. ABS Parking intends to introduce new technology in managing the parking services coupled with the purchase of automatic teller machines. Therefore, the management of ABS Parking is interested in knowing whether this is a viable investment option or not.

In the first scenario, revenue is shared between the City and ABS parking on 20%-80% basis. Analysis of the expected cash flows is as follows:
Initial payment = $15000000
Amount for ABS Parking = 80% X $900000 = $720000
Expected annual increase = 5%
Expected Annual decrease = 2%
Ratio of sharing parking revenue = 1:1
Total cost of the parking meter boxes = $25000 X 130 boxes = $3250000
Expected Increase = 3%
Expected annual increase = 5.2%
Hurdle rate = 5%
Inflation rate = 2.3%

Computation of the real rate of return

Where I = Nominal Interest rate
R = Real interest rate
E = Expected inflation rate
Therefore, real interest rate = (1+i) / (1+e) – 1
Hence, r = (1+0.05) / (1+ 0.023) -1
R = 1.05/1.023 – 1 = 1.0264-1
R = 2.64%

R is approximately 3% hence the inflation adjusted discounting rate.

Using the expected cash flows method, both lease options are not viable as they lead to a negative net present value. However, lease option 2 is preferable to 1 since it has a higher net present value than option1.

In the best case scenario;

Increase in revenue = 7%
Decrease in ticket revenue = 1%
Maintenance fees increase = 2%

In the worst case scenario;

Increase in revenue = 3%
Decrease in ticket revenue = 3%
Maintenance fees increase = 8%

Sensitivity Analysis

Conclusion